Wednesday, October 16, 2013 9:09 AM jstone

Get On Board the Public Service Loan Forgiveness Train

 Any 3L who has already come in for a loan counseling session has probably heard my (overused)  analogy of “ getting on the COAP train and riding it to the end of the station”, meaning determining  a way to maximize your COAP benefits for a full ten years of eligibility.   Well, there’s another train that you may also wish to ride either exclusive of or in tandem with COAP…. Public Service Loan Forgiveness.

Public Service Loan Forgiveness was initially established by Congress with the College Cost Reduction and Access Act of 2007.  And despite the fact that its been around for 6 years, as a recent article in the New York Times reported,  the program has been underused.  The Consumer Financial Protection Bureau has even developed an “Employer’s Guide to Assisting Employees With Student Loan Repayment”  to encourage public service employers  to start actively  promote PSLF among their workforces. 

So why aren’t more people taking advantage of this  “free” loan forgiveness?   Two factors come to mind:
 
First, while the program was launched in 2007,   the Department of Education had no system in place to actually track public service employment until 2012 (yes five years into the program!).  But now that a system has been established  with an annual ‘Employment Certification for Public Service Loan Forgiveness Form”  and a loan servicer  (Fed Loans) appointed as the sole servicer for borrowers in this program, these issues should be addressed going forward.

Second, as the article in the Times references, is the complexity of who gets PSLF for what loans under what conditions.   Basically PSLF works this way…  IF the borrower makes 120 separate, one time monthly payments IN certain loan repayment plans WHILE maintaining working in a public service organization(s) during that 120 month period THEN the borrower may have the remaining balances on the Direct Loans forgiven.   For more information on what the IF, IN, WHILE AND THEN really means – see the federal PSLF website for the program’s specific eligibility requirements.

Because what I wanted to focus on in this post are the two questions I get asked most frequently by students considering PSLF :

Question 1: If I have COAP,  why would I need Public Service Loan Forgiveness?  

The general answer in most cases would be, if you have full COAP eligibility for all ten years of COAP (again the COAP train analogy), then most likely you would not even need to consider Public Service Loan Forgiveness as an option. But given changes in your own income, the addition of a spouse income, accumulated assets or even the amount of your total debt burden, there may be situations where based on the COAP formula you “income out” of COAP (i.e. your assessed COAP contribution surpasses the calculated COAP repayment amount based on either the 15 year repayment in COAP years 1-5 or the 5 year repayment in COAP years 6-10).   In that situation if you  were not eligible for COAP  but still were employed in public service  (and committed to it for the balance of the 120 loan payments) then PSLF might be a viable alternative for  you. The issue would be that you would have to have a sense of that happening right from the outset of your loan repayment to insure you got on one of the eligible PSLF repayment plans from the get go and started banking those 120 payments as soon as possible. This is where one of our loan repayment counseling sessions can really assist you because part of that process is actually estimating your COAP eligibility (based on projected income and loan debt) for the full 10 years of COAP so that you can see how long you might receive support and if you should be making accommodations for PSLF as an option.

Question 2: How likely is it the Public Service Loan Forgiveness will be around when I actually need it? 

We have no indications that PSLF is going anywhere yet this question continues to haunt us Financial Aid folks.  Why? Do the math.. the program started in 2007 which means the first “graduating class” (i.e. the first group of borrowers to complete the 120 payments) won’t happen until 2017. That’s the magic moment when all these people (who up until last year when they required people in PSLF to identify themselves we had no idea  existed) will step forward and ask the government to forgive the balance of their loans and write off their debt.  Why is that significant?  Because unlike other federal loan forgiveness programs where the forgiven debt is a taxable occurence  (i.e. must be declared as income by  the borrower in the tax year in which it is forgiven) in Public Service Loan Forgiveness the forgiven debt is not taxable .  So while you could argue that the actual forgiveness of PSLF loans doesn’t have a direct cost to the government (these are all federal loans so the debt is “written off”) it could have a significant tax loss which may make it a target for review.   On the optimistic future side for PSLF it should be noted that PSLF is not subject to appropriations or the budgetary process so literally it would take an act of Congress for it to go away.   And if that were to happen (switch to pessimistic side) one would also hope that individuals currently clocking time in the program would be grandfathered to completion.   The reality is that I don’t have a crystal ball capable of predicting the long term future of PSLF let alone any other federal aid program. 

Want to learn more about if Public Service Loan Forgiveness is right for you or how it can work with COAP?  Come to our COAP In Action workshop this spring where we dedicate a portion of the session to the specifics of PSLF. Want an individual loan counseling session to chart out your COAP eligibility?  Contact the Financial Aid Office at financialaid.law@yale.edu.

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